4 Proactive Steps to Financing a Business Expansion

The outlook for U.S. businesses is strong, with the CEO Economic Outlook Index rising above its historical average of 79.8 to 93.3 in the first quarter of 2017.1 For some, that means new capacity, additional staff, an updated enterprise resource planning system (ERP) and/or a larger facility.

If growth is in your business’s future, you’ll likely need financial help to accomplish it, and your banker is a great resource. As a trusted financial partner, he or she can help evaluate your financing options and develop a sound, well-structured plan to capitalize your growth. Here are some key considerations you should discuss as you map out a growth strategy and financing options.

1. Look at the numbers

When you have the initial meeting with your banker to discuss growth ideas, come armed with your company financials, as well as information about your personal assets. Together you both can review and forecast the costs associated with expansion and provide projections of what you expect to be able to do or produce with the additional capacity. This will help him or her evaluate your projected cash flow and, subsequently, your credit risk. It is also your chance to articulate your vision of how you’ll generate new business to utilize the assets you’re planning to put in place.

The bank will also want to see a business plan that details how the money will be used to grow your business, how much money is required to achieve this growth, how the money (and interest) will be repaid, and how much additional owner’s equity might be needed.

2. Examine Your Current Debt Structure

As part of the financial analysis, you’ll need to determine how much additional debt your business can reasonably and comfortably assume. A banker can help you approach your current debt structure as a “clean sheet of paper,” meaning he or she can help determine the best way to refinance existing debt with potentially better terms to improve liquidity and cash flow. This could very well give you immediate access to some amount of capital to help fund your expansion. For instance, shifting debt from equipment to real estate can free up collateral to finance the purchase of new equipment or maintain existing machinery.

3. Be Realistic

Transparency is critical in these discussions. Be sure to share your long-term objectives as well as insights about your industry, competitors, trends and markets to help him or her better evaluate your potential for growth. This information may also trigger suggestions on how to avoid potential pitfalls, leverage assets and identify different and creative ways to accomplish your goals.

You and your banker should also discuss any obstacles that might stand in your way or put the company in jeopardy, then develop a game plan for how to overcome or avoid them. By taking an honest look at potential setbacks and preparing contingency plans, you can manage and mitigate these risks long-term.

4. Determine financing options

Based on your needs and financial statements, your banker will help identify loan options that are a good fit for you, such asconventional financing (traditional term loans, local loan programs, etc.), a short-term line of credit, or a government-backed Small Business Administration (SBA) loan. SBA financing may make sense if you need to stretch out your payments over a longer period to maintain cash flow.. The SBA 504 Loan is often a preferred choice to fund real estate, new equipment or expansion projects; while the SBA 7(a) Loan, Cap Lines or Express program are other options to consider.

Some final notes

As you continue discussions with your banker, keep in mind that he or she will pay close attention to the following areas while considering your business’ growth and funding options:

Your personal creditworthiness — Most banks today look carefully at what’s referred to as global cash flow—or the aggregate of the business’ finances and the owner’s personal finances—when analyzing business loan requests. Therefore, you should strive to build and maintain a strong personal credit profile and credit score, as well as a strong business credit rating.

Owner’s equity and personal guarantees — Banks generally expect owners to be willing to invest some of their own money into their growth plans. In other words, you should have some of your own “skin in the game.” The bank may also require you to personally guarantee the loan, including pledging your primary residence as collateral for the debt.

It’s easy to get ahead of yourself when contemplating a business expansion. However, involving your banker along the way can help ensure your business is poised for growth and has the financial plan to support it. Ready to take the next step? Download our Business Loan Application Checklist to prepare for a productive conversation with a banker today. Click the button below to get your copy.

Click to subscribe to the Business Blog and receive the latest insights from ICB delivered straight to your inbox: Subscribe Now.

Will has been serving customers’ banking needs for nearly 20 years and is Vice President—Business Banking at Investors Community Bank. He enjoys the small bank setting where he can creatively help small businesses access the capital they need to grow. Will specializes in manufacturing, commercial real estate, SBA lending, trucking, dentists, contractors, making connections, advising and business strategy.

Views provided in this blog are general in nature for your consideration and are not legal, tax, or investment advice. Investors Community Bank (ICB) makes no warranties as to accuracy or completeness of information, including but not limited to information provided by third parties, does not endorse any non-ICB companies, products, or services described here, and takes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarily represent ICB’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.